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FORECASTING MUNICIPAL REVENUE William Michael Rodgers, CPA Director of Finance and Administration City of Webster, Texas Spring 2017 TML Budget Workshop 1
FORECASTING
MUNICIPAL
REVENUE
William Michael Rodgers, CPA
Director of Finance and Administration
City of Webster, Texas
Spring 2017 TML Budget Workshop 1
It’s Budget Time Again
Spring 2017 TML Budget Workshop 2
How Do You Estimate Revenues?
• Review your books
• Are revenues greater or less than last year?
• Is it what you anticipated?
• Look outside
• Is your population growing?
• Do you see any new construction?
• Listen to those who know
• Have you heard the latest business news?
• What is the current barbershop gossip?
Spring 2017 TML Budget Workshop 3
Major Sources of Municipal Revenue
• Property tax
• Sales tax
• Mixed beverage tax
• Franchise / access tax
• Hotel occupancy tax
• Permit / license fees
• Court fines and fees
• Charges for service
• Transfers in
• Use of Reserves
Spring 2017 TML Budget Workshop 4
Property Tax Revenue
• Reliable and relatively stable source of revenue
• Residential component can constrain revenue
growth
• Increase to residential property value is limited by law
• Tax exemptions can reduce value considerably
• Residential taxpayers are also voters!
• Commercial and industrial property values are
less predictable
Spring 2017 TML Budget Workshop 5
City of Webster Property Value History
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
$-
$50
$100
$150
$200
$250
$300
$350
$400
2001 2003 2005 2007 2009 2011 2013 2015
Mil
lio
ns
% Change from Previous Year Residential Properties
Spring 2017 TML Budget Workshop 6
City of Webster Property Value History
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
2001 2003 2005 2007 2009 2011 2013 2015
Mil
lio
ns
% Change from Previous Year Commercial & Industrial Properties
Spring 2017 TML Budget Workshop 7
Property Tax Revenue
• Revenue indicators include:
• Appraisal District preliminary estimates
• Construction permit values
• General economic news about community
• Local real estate association news such as Houston
Area Realtors’ HAR.com
Spring 2017 TML Budget Workshop 8
Sales Tax Revenue
• Sales tax can contribute a large amount of
revenue, but it is much more volatile than other
sources
• It is susceptible to changes in economy, even at
national and international levels
• Higher reserve levels are required in funds that
rely upon sales tax revenue
Spring 2017 TML Budget Workshop 9
City of Webster Sales Tax History
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
2001 2003 2005 2007 2009 2011 2013 2015
Th
ou
san
ds
% Change from Previous Year Sales Tax Revenue
Spring 2017 TML Budget Workshop 10
Sales Tax Revenue
• Revenue indicators include:
• Sales tax permits
• Certificates of Occupancy
• Press releases from public companies
• Sales figures for comparable businesses
• Texas Comptroller’s confidential report per Tax Code
Section 321.3022
• Federal Reserve Beige Book
Spring 2017 TML Budget Workshop 11
Mixed Beverage Tax
• A tax of 6.7% is imposed on the gross receipts
from the sale of mixed beverages
• Rate was lowered from 14% to 6.7% in 2014
• Cities are allocated 10.7143% of the tax received
• There is also an 8.25% mixed beverage sales tax
• Revenue indicators include:
• Average collection in past years
• Changes to the number of bars and restaurants
• Texas Comptroller website
Spring 2017 TML Budget Workshop 12
Franchise / Access Fees
• Cities can charge a franchise or access fee to
utilities for the use of the City rights-of-way
• Many fees are now governed by the Public
Utilities Commission
• Revenue indicators include:
• Utility company notification
• Average collection in past years
Spring 2017 TML Budget Workshop 13
Hotel Occupancy Tax
• Cities can adopt a tax on the room rate charged
by hoteliers
• The maximum tax rate is 7% with the exception of
certain jurisdictions
• This special revenue can only be spent on those
items identified by State law
• Revenue indicators include:
• Occupancy rates
• Overall economy, both locally and nationally
• Special events in the community
Spring 2017 TML Budget Workshop 14
Permit / License Fees
• Cities can charge fees for the permits and
licenses that are issued
• The rates charged are determined by Ordinance
• Revenue indicators include:
• Anticipated and ongoing construction activities
• Amount of available space for new development
• Average collection in past years
Spring 2017 TML Budget Workshop 15
Court Fines & Fees
• The State and Municipal Judge set the various
court fines and fees
• Some collections are returned to the State
• City cannot set quotas for number of citations to
be issued
• Revenue indicators include:
• Increased enforcement efforts by Police
• Changes to traffic patterns or construction
• Average collection in past years
Spring 2017 TML Budget Workshop 16
Charges for Service
• Utilities and certain general government functions
charge users for services provided
• Utility Funds should strive to cover all expenses,
including depreciation, with rate revenue
• Revenue indicators include:
• Rate changes, if any
• Consumption by comparable users
• Average revenue for multiple years
• For utilities, weather makes a difference!
Spring 2017 TML Budget Workshop 17
Transfers In
• A City may transfer money between funds
• The transfer is typically based upon the value of
services provided by the receiving fund
• Some utilities transfer funds into the General
Fund in lieu of paying taxes
• There should be a written document describing
the purpose and amount of each transfer
Spring 2017 TML Budget Workshop 18
Use of Reserves
• Planned use of accumulated reserves is an
acceptable source of revenue
• Best if used for one-time or capital expenditures
• Drawing down reserves for recurring
expenditures can be a sign of distress
• Expenditures may be growing more rapidly than
revenue
• May need to increase property tax rates
• May need to cut expenditures
Spring 2017 TML Budget Workshop 19
Long-Term Forecasting
• Rule #1: The numbers are wrong!
• Rule #2: The longer the period, the “wronger” the
numbers!
• Forecast only what is known rather than what
might occur
• Agree on assumptions and math does the rest
• The results are used to show trends over time
Spring 2017 TML Budget Workshop 20
Is This Good?
$10
$12
$14
$16
$18
$20
$22
$24
2016 2017 2018 2019 2020
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City of TX Long-Term Financial Projection
Revenue Expenditures
Spring 2017 TML Budget Workshop 21
What About Now?
$10
$12
$14
$16
$18
$20
$22
$24
2016 2017 2018 2019 2020 2021 2022 2023 2024
Mil
lio
ns
City of TX Long-Term Financial Projection
Revenue Expenditures
Spring 2017 TML Budget Workshop 22
Beware of Forecaster Bias
Spring 2017 TML Budget Workshop 23
Beware of Forecaster Bias
• An optimist may use overly aggressive revenue
assumptions over time
• Higher-than-average revenue gains predicted
• Revenue trends never decline
• Can result in budget shortfalls if results don’t
appear
• An optimist rarely hits assumption targets
Spring 2017 TML Budget Workshop 24
Beware of Forecaster Bias
• A pessimist may budget too conservatively
• Little or no growth is anticipated
• Revenue trends remain essentially flat
• Can result in unnecessary budget cuts
• Often exceeding assumption targets is indicative
of a pessimist
• A realist is an optimist with experience!
Spring 2017 TML Budget Workshop 25
Any Questions?
William Michael Rodgers, CPA
Director of Finance and Administration
City of Webster, Texas
(281) 316-4102
Spring 2017 TML Budget Workshop 26
